Xiaomi’s Mega-Funding: Investor Exit Near

The news keeps coming thick and fast for Xiaomi, arguably China’s hottest company right now in the overheated tech space, which has just raised a tidy $216 millon in funding as its low-cost, high-performance smartphones become the latest must-have item in China’s mobile market. That kind of new funding for young high-tech companies hasn’t been seen in China for nearly a year now due to concerns about an Internet bubble, making this capital injection all the more impressive for a company like Xiaomi which only launched its first product last fall. The big size of the funding leads me to suspect that Xiaomi’s investors are aiming to boost not only the company’s manufacturing capacity and profile, but also its valuation in the run-up to either an IPO or perhaps a sale of the company as early as by the end of this year.

Let’s have a look this latest news, which had Xiaomi picking up the big new investment, its third major funding to date, around the time of the Dragon Boat Festival last week. (English article) The company’s high-profile founder Lei Jun said the new funds came from an international source, but declined to give any names, citing confidentiality agreements. Earlier reports had indicated that the new investor group included Russia’s Digital Sky Technologies, an early investor in Facebook (Nasdaq: FB) and a big believer in Chinese high-tech firms following other big investments last year in e-commerce giants Jingdong Mall and Alibaba. (previous post) The new money follows a combined $130 million that Xiaomi received in its first 2 funding rounds in 2010 and 2011 that came from other big global investors like Singapore’s Temasek and leading cellphone chipmaker Qualcomm (Nasdaq: QCOM), and values the company at around $4 billion, according to the reports.

It wasn’t unusual Chinese tech start-ups to get that kind of funding as recently as last year, when Internet companies were pulling in hundreds of millions of dollars as investors bet on who would become China’s next Facebook, Amazon or Twitter. The trend culminated last spring, when a fast-growing Jingdong Mall, also known as 360Buy, broke records for Chinese Internet firms by getting more than $1 billion in a single funding round that included Digital Sky. But since then the market has cooled considerably as investors realized the market had become overcrowded and many of the companies they were funding might never become profitable.

Of course, one of the big differences with Xiaomi is the company’s focus on hardware rather than the Internet. Unlike the many web firms, Xiaomi has convinced investors that it not only can make a product that consumers want, but that it can do so profitably. Sales of its launch product, the MI-ONE, have reportedly gone quite well , with previous reports indicating it sold 400,000 units alone in its first few months and was on the cusp of a major deal to supply 1 million more units to Unicom (HKEx: 762; NYSE: CHU), China’s second largest mobile carrier.

With all that momentum behind it, it’s not difficult to imagine that Xiaomi’s investors are probably thinking they should take advantage of all the hype to push up the company’s value and cash out of their investment while opinions remain favorable. People who follow the cellphone space know that today’s investor favorite can easily become tomorrow’s ugly stepchild, as evidenced by the recent rapid declines of former high-flyers like Motorola Mobility (NYSE: MMI ), Nokia (Helsinki: NOK1V) and most recently Taiwan’s HTC (Taipei: 2498).

Accordingly, I would look for the first reports that Xiaomi has hired an investor banker to emerge in the next 2-3 months, followed by reports of a potential IPO or sale of the company. Usually I would say an IPO was the more likely end game for a company like Xiaomi, since such deals allow opinionated founders like Lei Jun to remain in charge of their companies. But in this case, I would say a sale of the company could be equally attractive, partly because the IPO market is relatively cold right now and also because many of China’s top Internet names like Baidu (Nasdaq: BIDU) and Alibaba have shown a recent interest in developing their own smartphones. So at the end of the day, I would say the chances of an IPO versus a sale of Xiaomi are about equal, with a deal likely to value the company as high as $8 billion – or about twice its current valuation.

Bottom line: A new massive fund-raising round for Xiaomi indicates a sale of the company or IPO could come by year end, which could value the company at up to $8 billion.